The End of Economic Development Tiers in North Carolina?

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In many ways, the system of economic development tiers that North Carolina uses to determine which counties are most in need of state support has never fully lived up to expectations. With the passage of the William S. Lee Act in 1996, the tiers system was applied to all 100 counties in the state. The original intent was to use the tiers to identify the most economically distressed counties that would benefit from higher tax credits being made available to the businesses who locate in those jurisdictions. The policy idea makes complete sense: use a formula to rank all 100 counties based on their level of economic distress and offer larger tax credits to induce businesses to locate in the ones that chronically lag behind. The only problem is that it has never quite seemed to work in practice as originally intended. Could it be time to scrap the economic development tiers system all together and figure out a substantively better way to assist the state’s chronically distressed communities? A new report calls for the state legislature to do just that.

For a long time, analysts and policy makers thought that the problem was the formula used to designate a county’s tier status. Many local officials were inevitably unhappy with their county’s respective tier designation in any given year. The thinking was that if we could just get the right distress metrics in the formula, then the policy would work. As a result, the precise composition of the distress formula has been modified and tweaked incrementally multiple times since 1996. New distress indicators would be added and others would be dropped. Still there was always, and continues to be, concern that any particular iteration of the tier formula may not be capturing important aspects of economic distress for some counties.

The current formula used to designate economic development tiers is calculated based on four distress indicators:

Average unemployment rate for most recent 12 months

Median household income for most recent 12 months

Percentage growth in population for most recent 36 months

Adjusted assessed property value per capita in most recent year available

Each county is assigned a ranking from 1-100 based on the sum of these indicators. The 40 counties with the worst rankings receive a Tier 1 designation, the next 40 are Tier 2, and the 20 best performers are Tier 3.

In the latest attempt to fix the tiers formula, the NC Commerce Department has proposed some new changes. These include reducing the number of distress factors from four to three, eliminating the adjustment for population size and poverty, and eventually moving to an index with no actual tier designations.

An analysis conducted by the Program Evaluation Division of the North Carolina General Assembly casts doubt on whether the changes proposed by the Commerce Department will enhance the formula’s ability to measure chronic economic distress. The report released in December 2015, makes three core findings regarding the way North Carolina has used the tiers system. The first is that using the tiers system to distribute state funding has not helped the state’s most distressed counties as intended. Though originally created specifically for economic development tax credits, several non-economic development programs now use the tier designations in distributing state dollars. Despite the adoption of the tiers by other state programs, it is apparent that Tier 1 counties are not benefiting the most.

In its second key finding, the Program Evaluation Division report notes some possible ways the existing tier formula may distort our interpretation of economic distress. For example, the formula’s population adjustments assume that being small in size is an automatic marker of distress. Of course, that is not always the case. In addition, using a county-based tiers system may not reveal pockets of localized distress given the substantial variation in economic conditions that exists within some counties. For a related discussion, see a previous post by Professor Maureen Berner.

A third finding suggests that North Carolina’s approach to measuring economic distress and assisting lagging communities may be outdated since the Generally Assembly has not taken up the issue in any comprehensive manner since the 1980s. Policies and programs have changed. Over time, the state has shifted the emphasis in its economic development policy away from statutory tax credits in favor of discretionary grant programs. In fact, the business tax credits for which the tiers system was created to implement ended in 2014.

Based on its extensive analysis of the history, evolution, and current application of the economic development tiers in North Carolina, the Program Evaluation Division report recommends that the General Assembly do the following:

Eliminate the use of the economic development tiers system for all non-economic development programs by July 1, 2017.

Terminate use of the tiers system for all economic development programs by July 1, 2018.

Establish a commission to reexamine the North Carolina’s strategy for identifying and assisting chronically distressed communities.